De Economist

, Volume 160, Issue 4, pp 397–412

Portfolio Implications of Cointegration Between Labor Income and Dividends

Article

Abstract

This paper analyzes the implications of cointegration between labor income and dividends for the optimal portfolio weight for stocks. In a recent paper, Benzoni et al. (J Finance 62:2123–2167, 2007) claim that, as a result of cointegration, the optimal weight in stocks may be smaller for young investors than for older investors. This contradicts the traditional life-cycle models which typically imply portfolio weights that decrease with age. This paper shows that when stock returns are affected by other factors than dividend growth, for example due to time-varying discount rates, the portfolio implications of cointegration are much less severe. In a realistically calibrated model, the life-cycle pattern for the portfolio weight of stocks is flat, except for very young investors.

Keywords

Life-cycle portfolio choice Cointegration Human capital 

JEL Classification

G11 

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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.Department of FinanceTilburg UniversityTilburgThe Netherlands

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